Oil prices rise in anticipation of extended OPEC-led production cut

Share

As ministers gathered in Vienna for informal consultations on Wednesday, Saudi OPEC ally Kuwait said discussions included the possibility of deepening the cuts or prolonging them by 12 months.

Thursday's agreement will extend by nine months a deal made at the end of past year to cut oil production. But the hoped-for benefits could be short-lived.

Given these two indicators, the US Energy Information Administration (EIA) has repeatedly revised its production outlook upwards, most recently to an average of 9.3 million bpd for this year, a figure that may be revised even higher should the pace of production accelerate further.

While oil producers are eager to push prices up by freezing output, staunch competition from USA shale producers, which are leaner and faster operations, tends to push prices back down whenever they go above a certain level.

A key reason why markets have not tightened more has been USA oil production, which has soared by 10 percent since mid-2016 to 9.3 million bpd.

The reductions have been in effect since November, when the 13-country Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels daily.

The market sees an extension by nine months as the base-case scenario since OPEC's de facto leader Saudi Arabia and top non-member Russian Federation said this month they favored such a move.

Amrita Sen, chief oil market analyst at Energy Aspects Ltd., also warned that further market disappointments may be forthcoming: "A nine-month extension is effectively a done deal, but because Russian Federation and Saudi Arabia announced their support for it earlier in the month, the market may be disappointed if Thursday's meeting ends with "just" a nine-month extension, and prices may sell off".

Additional psychological pressure on OPEC is coming from President Donald Trump.

Past forward curves show that US oil production rose at its fastest pace during times when prices were in backwardation (2011 to 2014).

More news: Trump Says Israel And Arabs United By Threat Of Iran
More news: Trump makes personal appeal to both sides for Mideast peace
More news: CBO: Estimated 23 million would lose health insurance under Republican bill

Miswin Mahesh, an oil analyst at Energy Aspects, told CNBC via telephone that "oil prices are always choppy" when OPEC meetings are in session.

North Sea Brent crude oil, which is widely used as a price benchmark, hit a high of around $115 (£88) a barrel in June 2014 but by the end of the year it was half that amount.

"We are optimistic about the statements and the meetings held between the Saudi-Russian sides", he stated, adding that the previous extension had helped to balance the market and maintain average prices.

While OPEC is unanimously supporting the idea of extending production cuts to rebalance the oil market, according to Iranian Oil Minister Bijan Namdar Zanganeh, not all non-cartel countries have made their stance clear.

Crude oil is too cheap for the taste of many producers.

The earlier decline in oil price, which started in 2014, forced Russian Federation and Saudi Arabia to tighten their belts and led to unrest in some oil-producing countries, including Venezuela and Nigeria.

Whether this will succeed in lifting oil prices by much remains to be seen, however, particularly because of competition from the United States. Crude prices are unlikely to rise substantially - and that means the era of windfall profits appears to be over for member nations, at least for now.

Most OPEC ministers including Iraq's have already voiced support for extending cuts by none months.

Meanwhile, Lukman Otunuga, Research Analyst at FXTM, remarked: "With the production cut agreement still not legally binding and no punishments in place for those who don't adhere to its stipulations, there remains a strong temptation for individual countries to cheat in a bid to gain more market share".

Share